Hungary’s Upcoming Rate Call Hinges on One Person

Andrea Bartfai-Mager at the parliamentary committee hearing in March 2011

One member of Hungary’s seven-member Monetary Policy Council, Andrea Bartfai-Mager, will once again tip the balance at the central bank’s upcoming rate decision at the end of July.

The start of official talks with the European Commission and the International Monetary Fund on a €15 billion credit line is a new development since the last policy meeting. Access to the money is expected to alleviate concerns about Hungary’s financial stability.

Warning against too much optimism, the three internal members–the governor of the central bank, Andras Simor, and his two deputies Julia Kiraly and Ferenc Karvalits–will most likely act as hawks. They have repeatedly pointed to risks like high inflation or Hungary’s vulnerability to external shocks due to its high foreign currency indebtedness, as well as the risk of further drop in lending as banks’ financing is drying up rapidly. They are expected to vote for rates to be kept on hold, with the benchmark rate at 7%.

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Within the MPC, internal members are nominated by the prime minister and appointed by the country’s president, while external members are appointed by parliament.

Focused on stimulating economic growth and lowering interest repayment costs, three other members of the rates panel–Janos Cinkotai, Gyorgy Kocziszky and Ferenc Gerhardt–will presumably act as doves. Mr. Cinkotai has voted consistently for lower rates this year with the exception of a hold call in January, while Mr. Gerhardt and Mr. Kocziszky’s earlier comments show they are confident that an agreement with creditors would strengthen Hungarian assets so much it can point to relatively quick monetary easing.

Hungary’s base rate was highest at 11.5% in October 2008, at the peak of the economic crisis after the Lehman Brothers collapse. The rate was gradually cut to 5.25% with the last easing in April 2010, signaling how markets recovered after the crisis. However, under pressure from the euro zone debt crisis, the bank once again took up monetary tightening, gradually pushing the rate to the current 7%, with the last move in December, 2011.

At the January central bank rate decision, the external members including Ms. Bartfai-Mager voted to keep the key policy rates on hold while the three internal members voted to tighten monetary conditions. Hungary’s assets were hit heavily at the time and international observers grilled the government after parliament passed a controversial central bank law. The central bank raised the key rate by half a percentage point to 7% in December. In January, the government then decided to take a U-turn and strongly affirmed its commitment to an IMF package, and recently changed the legislation to conform with the creditors’ wishes.

The market will now hold its breath to see how the unapproachable Ms. Bartfai-Mager, who hasn’t given any interviews or appeared on television or radio since appointment in March 2011, will assess Hungary’s current situation.

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